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Getting Closer Home

2006 is remembered for astronomical property prices and rising interest rates. but 2007 may bring in correction in property prices and interest rates on home loan s may stabalise.

Pooja Gawde

14 Aug 2007

2007 could be the year when prices may soften a bit and if you are lucky, home loan interest rates may stabilise.

While 2006 could be remembered for all the negative reasons for the property buyer, the year 2007 may actually usher in some relief. Surprised? - You should be. But there is a good reason to believe that after March-end some correction in property prices is likely.

Let Bygones Be Bygones

The Reserve Bank of India (RBI) and, more recently, the Central government has 'advised' the banks in their own capacity to go slow on the realty sector. The year began with the government allowing 100 per cent Foreign Direct Investment (FDI) in real estate, but it ended with the same government asking banks to lend less to the realty sector. Besides, the RBI has been making all the noises about this sector being 'overheated' for almost one-and-a-half years. And finally, the government and RBI seem to be concurring.

The Year That Was
Most real estate experts opine that there has been negative growth in the market. The prices have been shooting up primarily because the real estate market has become a 'seller's market'. Ideally, every market functions on the demand supply equation. It can arrive at a right price only when the demand equals the supply. But, the former is a utopian situation as demand always exceeds supply or vice-versa. For
instance, in Mumbai, a buyer might pay Rs. 20,000 or more per square feet for a property along Napean Sea Road. But, do not believe even for a second that this is the right price for that property. It simply reflects the fact that there is more demand than supply on Napean Sea road. As an industry expert puts it, "The market is not efficient anymore."

Therefore, rising prices can actually be attributed to lack of supply, especially in cities like Mumbai. The situation could worsen if the proposed abolition of the Urban Land Ceiling Act, 1976 (ULCA) does not come into effect. Also, the profit margins have become wafer thin in the last few years. While in mid 90's, the profit margins of the builders could easily be 100 per cent, they do not enjoy such margins anymore. If market experts are to be believed, the margins have dropped to 20-30 per cent, and that too, in a regime where the project cost has risen by 60 to 70 per cent.

Double Whammy

Pankaj Kapoor, Director, Liases Foras, a real estate consultancy feels that due to the rise in the rate of interest to the tune of about three per cent in the last one-and-a-half years, the demand has fallen. There is empirical evidence now that demand for housing finance has been falling slowly, yet steadily. According to Kapoor's estimates, for every 0.05 per cent rise in interest rate, the demand decreases by about seven
per cent. "This effectively means that the demand for loans has decreased by about 30 to 36 per cent since the last one-and-a-half year," he adds.

Look Forward To...
Real estate players think that the present prices may be able to hold firm till March 2007. However, one could see some downward correction in the prices post-March. What is important is that there should be new supply in the estate market to help control prices. Presently, the slackness in activity is not very apparent because foreign investors are pumping the money and Indian builders are also aggressively trying to tap the IPO market.  So, new projects are still on the anvil.

Yes, investment in real estate continues to be a trend. But the mainreason, as many would believe, is due to the tax benefit it offers to home buyers. "The tax breaks offered for home buying offsets the burden one may have to bear due to huge pay packets," says an investment expert.

Though the home loan disbursement processes have slowed down currently, home finance is easily available still for the potential home buyer. As Dharmesh Jain, chairman, Nirmal Lifestyles optimistically says, "The marginal rise in the interest rates can easily be absorbed, taking into consideration the salaries drawn today."

In short, 2007 could be the year when things start to slow down a little, prices may soften a bit and if you are lucky, interest rates may stabilise. Amen!